Supplementary written evidence submitted
by Hutchison 3G UK Ltd (Three)
1. SUMMARY
1.1 Three welcomes the opportunity to respond
to some of the points raised in oral evidence to the Committee.
1.2 In particular, we would like to address:
the role of Mobile Virtual Network Operators ("MVNOs")
in the mobile market; the perceived challenges and costs of increasing
the 800MHz coverage obligation; the annual fees paid by the holders
of the 900Mhz & 1800MHz spectrum licences; spectral efficiency;
the immediate benefits of access to 900MHz spectrum and; differences
between 3G and 4G services.
2. COMPETITION,
NATIONAL WHOLESALERS
AND MVNOS
2.1 In oral evidence to the Committee on 28 June
2011, Vodafone explained that there were 20 notable, individually
branded MVNOs in the UK. They told the committee that there was
no evidence to show that operators that were unsuccessful in the
auction would be unable to secure wholesale access agreements
and that, where the market was seen to be operating non-competitively,
Ofcom has the power to intervene. Telefonica, meanwhile, argued
that market competitiveness in the UK is defined by "innovation,
the number of people of people providing retail services, as well
as the availability of capacity within the overall networks to
be able to sell that capacity to customers".
2.2 We believe there are several points that
the Committee may wish to take into account when considering this
evidence given by O2 and Vodafone.
2.3 Wholesale versus retail competition
2.3.1 In response to questioning from Adrian
Sanders MP about the wholesale operators controlling the price
to MVNOs, Vodafone CEO Guy Lawrence replied that there was no
evidence of price abuse by the wholesale operators and that "Ofcom
has powers to control the market if any of the operators started
abusing that, but there is no evidence that that happens".
This is incorrect.
2.3.2 In their 2009 Mobile Evolution report[58]
Ofcom found that "Some MVNOs stated that there are problems
with securing wholesale network access and that Ofcom should consider
imposing an 'access-related condition' to require MNOs to provide
access on a fair reasonable and non-discriminatory (FRND) basis.
Other MVNOs stated that it was difficult for new entrants to gain
wholesale contracts due to the difficulty of negotiating wholesale
contracts without an existing customer base". Furthermore,
in a submission to the Ofcom consultation that preceded the Mobile
Evolution report, Which? raised concerns about the impact a reduction
in the number of mobile wholesale operators would have on competition
and in particular the impact this would have on MVNOs, stating
that further consolidation (after the merger of T Mobile and Orange)
could weaken the bargaining power of MVNOs.[59]
2.3.3 The evidence from Which? and from MVNOs
about wholesale negotiation supports Ofcom's conclusion that the
spectrum auction must be structured so as to sustain four viable
wholesale networks and thereby widen the wholesale choice available
to MVNOs.
2.4 Ofcom's powers to intervene
2.4.1 As referenced above, Vodafone in their
oral evidence told the Committee that Ofcom has the power to intervene
should wholesale operators be found be abusing their wholesale
position. This is technically correct, but the process that would
lead to such an intervention would not be expeditious.
2.4.2 Unlike in the fixed market, where Ofcom
has a range of regulatory interventions at its disposal should
it believe that BT is abusing its wholesale position, Ofcom does
not have an immediate regulatory lever though which it could correct
an abuse. Instead, Ofcom would have to undertake a market review
to establish the level of competition in a market. If a market
is found not to be effectively competitive, Ofcom can impose the
following Significant Market Power conditions under the Communications
Act: Network access (including conditions about network pricing);
and provisions for securing fairness and reasonableness in the
way in which requests for network access from MVNOs are responded
to.
2.4.3 The difficulty with a market review is
the length of time it can take, with approximately three to six
months for MVNOs to make a case that an intervention is required
and for Ofcom to consult. This is followed by upwards of a year
for a final decision and a possible further year if a decision
is then appealed.
2.4.4 In the interim MVNOs would be left having
to accept the terms imposed on them by the mobile wholesale provider,
potentially to the detriment of consumers. This, however, is less
of an issue where MVNOs have a larger range of wholesale providers
to choose from and can switch to the provider offering better
wholesale terms. By seeking to guarantee competition Ofcom may
reduce the need for intervention after the event which would likely
be costly and time consuming.
2.5 More wholesale providers lower prices
2.5.1 There is a clear correlation between fewer
national mobile wholesalers and higher end user prices, regardless
of the number of MVNOs with access agreements. Figure 12 in our
response to Ofcom's consultation demonstrates the advantages of
four wholesale player markets across Europe where there is an
effective new entrant.[60]
2.6 Wholesale competition and service quality
and innovation
2.6.1 Improved service quality is one of the
key benefits of spectrum allocation. Presenting oral evidence
to the committee on 5 July, Minister for Culture and Communications
Ed Vaizey MP stated that "the point about getting spectrum
out is about competition and the effectiveness of the service".[61]
The way in which spectrum is allocated affects the quality of
service. For example, in addition to lower prices, markets with
four national mobile wholesalers demonstrate a better level of
network quality (via innovation and penetration) than three player
markets. Figure 13 in our response to Ofcom's consultation demonstrates
the advantages of four player markets with effective new entrants.[62]
2.6.2 On a broader issue of competitiveness and
innovation, the Committee heard in response to questioning from
Tom Watson MP that the recently announced mobile payment joint
venture between O2, Vodafone and Everything Everywhere had specifically
excluded Three from joining the venture as a partner. We believe
the exclusion of Three from this joint venture is not only contrary
to the approach taken in other countries where all wholesale providers
are partners in such a joint venture, but could be construed as
indicative of a desire by the other mobile network operators to
reduce the level of wholesale competition in the UK mobile market,
and runs contrary to evidence given to the Committee by O2
CEO Ronan Dunne that the effectiveness of competition is defined
by innovation.
3. COVERAGE OBLIGATIONS
3.1 On 19 May 2011 Rory Stewart MP led a debate
calling for an increase of the coverage obligation attached to
one 800MHz licence from 95% to 98%.[63]
Mr Stewart's motion received strong backbench support. In oral
evidence to the committee, neither Telefonica nor Vodafone objected
to a coverage licence, however Telefonica did raise concerns about
problems in providing coverage to the "last 4% or 5%"
because "the returns become disproportionately lower and
the cost becomes significantly higher".
3.2 The scale of investment required by Telefonica
and Vodafone to achieve coverage levels upwards of 95% is far
above what Three considers to be necessary. In their oral evidence,
Telefonica calculated that it would cost an additional £540
million of public investment to provide indoor coverage to 98%
of the UK population. Three calculates that it would cost £270
million of public investment to provide 99% of indoor coverage.
The difference in projected costs, we believe, is the result of
under-investment of Telefonica and Vodafone in their network infrastructure
rather than, as suggested by Vodafone and Telefonica, the perceived
difficulties in the UK's planning regime. Three, which possess
over 12,600 sites, operates within the very same planning regime
and yet we propose to extend our network by a further 3000 sites
over the next three years.
3.3 Three supports the proposed 95% population
coverage obligation and we believe that this could be extended
to 97% without requiring public subsidy. However our technical
modelling shows that the obligation would need to be attached
to 2x10MHz of 800MHz spectrum, rather than the current proposal
of 2x5MHz in order to achieve a speed of 2mbps.
3.4 When considering coverage obligations, the
Committee might wish to take into account discussions around the
coverage obligation that was placed on the 2100MHz licences awarded
at auction in 2000. When the DTI consulted on the proposals for
the auction of 2100MHz in 1997, they proposed an 80% coverage
obligation. O2 was alone among the operators in objecting to the
imposition of a coverage obligation; "As regards coverage,
Cellnet is less convinced of the usefulness of defining coverage
obligations. Consideration could be given, for example, to a 'let
the market decide' approach".[64]
3.5 Having acquired a 2100MHz licence with an
80% coverage obligation, O2 then responded to Ofcom's
2006 consultation on how Ofcom would measure whether the coverage
obligation has been met; "O2 does not believe that the terms
of its licence and the content of the 3G Information Memorandum
fetter Ofcom's discretion or provide a justification for ignoring
the need to ensure that regulatory burdens remain objectively
justified, proportionate, non-discriminatory and transparent as
required by Article 6(1) of the Authorisation Directive".[65]
3.6 What O2 appear to suggest is that
even when an operator has acquired a licence with a coverage obligation
it should still be possible for that operator, after the award
of the licence, to provide Ofcom with evidence that it would not
be proportionate for that operator to meet that licence obligation.
3.7 All mobile operators apart from O2
met their coverage obligation by the deadline set by Ofcom. Ofcom
granted O2 an extension to the deadline. Given this,
the Committee may wish to consider the approach Ofcom will take
to enforcing the coverage obligation on the 800MHz licence.
4. SPECTRUM FEES
4.1 The Mobile operators were asked by Tom Watson
MP what their annual licence fees were for the 900MHz and 1800MHz
licences. Vodafone replied that their total yearly spectrum fee
was £346 million. This is the licence fee for the 900MHz
& 1800MHZ spectrum plus the amortised amount Vodafone include
in their annual accounts for the purchase of their 2100MHz licence
in 2000. A parliamentary question, tabled by Stephen Timms MP
and answered by the Minister of State for Culture and Communications
on 4 May 2011, revealed that both Vodafone and O2 pay
£15,618,240 for their 900MHz and 1800MHz spectrum licences,
of which £12,402,720 is for the 900MHz licences[66].
Therefore the bulk of the £346 million given in evidence
by Vodafone relates to their 2100MHz licence which was paid for
in full and no fee is payable on an annual basis to the UK Government.
4.2 In its evidence to the Committee, O2 said
all operators had "made a major write-down of the value of
spectrum". That is true of O2, but not of Vodafone. Therefore
O2's annual spectrum costs will be lower than the £346 million
cited by Vodafone. Although O2 failed to tell the Committee what
its annual spectrum costs were, its annual licence fees are a
matter of public record.[67]
However these figures appear to be contradicted by oral evidence
from O2 CEO, Ronan Dunne who told the committee "We paid
£4 billion for our 3G licence and paid a similar amount for
our 2G". Vodafone told the committee that it paid £25,000
for its 2G licence.
4.3 Ofcom in its evidence set out the rationale
for linking the annual licence fees for the 900MHz & 1800MHz
licences to the auction prices for 800MHz and 2.6GHz prices. Based
on the German auction values, using the formula proposed by Ofcom
would see licences fees rise as follows:
— £105
million per annum for each of the licences for 2x17.5 Mhz of 900Mhz
spectrum and £18.8 million for each of the licences for 2x5.8Mhz
of 1800Mhz spectrum held by Vodafone and O2;
— £146
million per annum for 2x45 MHz of 1800 Mhz spectrum held by Everything
Everywhere taking into account the 25% of spectrum they must divest.
Total licence fees based on existing spectrum holdings
of O2, Vodafone and Everything Everywhere would therefore
be £356 million rather than the £64.5 million currently
paid.
4.4 The Committee may wish to confirm in their
report the actual amount paid in annual licence fees when reaching
its conclusions on Ofcom's proposals for the setting of annual
licence fees.
5. SPECTRAL EFFICIENCY
5.1 During the committee's oral evidence session
on 28 June, Tom Watson MP suggested that O2 and Vodafone
were indulging in "special pleading" in reference to
the fact they possess 900MHz, 1800MHz and 2100MHz licences. In
response to this, Telefonica told the committee that the operator
is the "most efficient user of spectrum" since it serves
the highest number of customers per MHz of spectrum. However,
the number of customers per MHz is not a relevant measure of how
efficiently an operator uses its spectrum. The most important
measure of spectrum efficiency is how much data is carried using
the spectrum.
5.2 Based on estimates by Enders Analysis[68]
Three carries 50% of mobile data. Everything Everywhere carries
23%, Vodafone carries 14% and O2 carries 11%. This
would suggest that Three is using its spectrum efficiently and
in line with the requirements placed on Ofcom to ensure efficient
use of spectrum. Despite carrying a disproportionate amount of
traffic compared to its spectrum allocation, research shows that
Three's network performs well. The respective ranking of UK operators
against 94 other European operators also highlights Three's spectral
efficiency. Vodafone and O2 (Telefonica UK) are mid
table, Everything Everywhere (T-Mobile and Orange) are near the
bottom of the rankings. Three ranks 14 out of 94.[69]
6. USING 900MHZ
FOR HIGH
QUALITY DATA
SERVICES
6.1 Much of the evidence given by Vodafone and
O2 centred on their inability to use their existing
spectrum to support 3G services.
6.2 In their written submissions to Ofcom's consultation,
both parties claimed it would take around two years to clear 2G
spectrum for 3G use. However the Committee were told that Telefonica
had already switched on 3G services in London on 900MHz.
6.3 Furthermore, evidence from Turkey suggests
that 2G customers can be supported on a minimum amount of spectrum.
Turkish operator Turkcell that provides services in demographically
and geographically similar environments to UK cities to 37 million[70]
2G customers using 11MHz[71]
of 900MHz spectrum. Vodafone and O2 have 19 million
and 22.3 million customers respectively, significantly fewer than
the 37 million customers Turkcell support off significantly less
spectrum than the 22.5MHz of 900Mhz and 1800MHz Vodafone and O2
hold. This would suggest that Vodafone and Telefonica could release
significantly more than the 2x5MHz of 900MHz that O2
have currently deployed for 3G in London and still support their
2G customers.
6.4 The demand for 2G services is expected to
drop to less than a quarter of its current level by Q4 2015. This
is a point alluded to by Inmarsat during the 28 June oral evidence
session, in response to Telefonica and Vodafone's concerns about
2G clearance. Mr Chris McLaughlin of Inmarsat told the committee
that "I heard this morning that so many people are on 2G
that they are never likely to want to be moved. I think the answer
is the other way round. If the 3G network was there, they would
get a 3G phone". Ofcom's most recent communication market
report[72]
found that 27% of adults and 47% of young people aged between
12 and 15 now own a smartphone. 59% of these consumers had acquired
their smartphone in the previous twelve months.
6.5 The committee may wish to consider whether
spectrum currently allocated is being used efficiently in line
with Ofcom's obligations under the Communications Act.
7. IS 4G BETTER
THAN 3G?
7.1 The performance of networks operating in
the 3G market place has reached a point where it is possible to
offer a quality of service nearing that of 4G technologies at
a considerably lower cost. The table below (extracted from our
consultation response) shows the performance difference in megabits
per second between the most recent development in 3G technology
(HSPA+) and 4G (LTE). The performance differences are marginal
in terms of the download speeds available to customers using a
3G network operating (HSPA+), which is available now and a customer
using a 4G network (LTE), available in several years time.
Table 10
PEAK DOWNLINK COMPARISON OF DATA RATES BETWEEN
HSPA+ AND LTE
| Technology | MIMO usage
| Carrier six (MHz) | Peak downlink data rates (Mbit/s)
|
| HSPA+ | Single stream | 5
| 21 |
| LTE | Single stream | 5
| 22 |
| HSPA+ | MIMO (2 X 2) | 5
| 42 |
| LTE | MIMO (2 x 2) | 5
| 43 |
| HSPA+ | Single stream | 10
| 42 |
| LTE | Single stream | 10
| 43 |
| HSPA+ | MIMO (2 x 2) | 10
| 84 |
| LTE | MIMO (2 x 2) | 10
| 86 |
Source: Analsys Mason.
(NB: MIMO refers to "Multiple In, Multiple out".
This is the use of multiple antennas at both the transmitter and
receiver to improve communication performance.)
7.2 The GSM suppliers association reports that there are currently
618 devices available that are compatible with HSPA+ in the 900MHz
spectrum. Contrast this against the 98 4G devices currently in
existence. These factors, combined with the opportunity for Vodafone
and Telefonica to free up the majority of their 900MHz spectrum
for 3G services means that they are in a very strong
position to offer data services immediately to a market that is
simply not practically addressable by Three and Everything Everywhere
who have no low frequency spectrum.
7.3 The later arrival of 4G devices and the time it will take
for them to penetrate the market, mean that it will be extremely
difficult for Three to compete with the established tariffs and
similar service levels available to Vodafone and Telefonica using
their 900MHz spectrum.
7.2 Telefonica also claim that devices available for 4G services
in 900MHz are not compatible with carrier sizes over 2x10MHz.
If there is truly such a disadvantage to these holdings as claimed
by Vodafone and Telefonica then they will be able to demonstrate
this by surrendering their holdings and availing themselves of
the spectrum floors currently proposed.
5 August 2011
58
Mobile Evolution-Mobile Market Assessment. Ofcom, December 2009
http://stakeholders.ofcom.org.uk/binaries/consultations/msa/statement/MSA_statement.pdf Back
59
http://stakeholders.ofcom.org.uk/binaries/consultations/msa/responses/Which.pdf Back
60
http://stakeholders.ofcom.org.uk/binaries/consultations/combined-award/responses/Three.pdf
Pg 47. Back
61
http://www.publications.parliament.uk/pa/cm201012/cmselect/cmcumeds/uc1258-iii/uc125801.htm Back
62
http://stakeholders.ofcom.org.uk/binaries/consultations/combined-award/responses/Three.pdf,
Pg 48. Back
63
HC Deb, 19 May 2011, c557. Back
64
http://www.ofcom.org.uk/static/archive/ra/topics/pmc/consult/m_media/umts06.pdf,
page 22.
http://www.ofcom.org.uk/static/archive/ra/topics/pmc/consult/m_media/umts06.doc
Back
65
http://stakeholders.ofcom.org.uk/binaries/consultations/3g_rollout/responses/O2.pdf Back
66
HC Deb, 4 May 2011, c753W. Back
67
HC Deb, 4 May 2011, c752W. Back
68
Enders Analysis 2010. Back
69
http://stakeholders.ofcom.org.uk/binaries/consultations/combined-award/responses/Three.pdf,
Pg 125. Back
70
http://www.mobiadnews.com/?p=3279 Back
71
http://www.turkcell.com.tr/c/docs/announcements/announcements_2008_0620_fass_Additional_frequency.pdf Back
72
http://stakeholders.ofcom.org.uk/binaries/research/cmr/cmr11/UK_CMR_2011_FINAL.pdf Back
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